Israel's Solid Fiscal Performance Loses Some Shine in November

The deficit widens and tax revenues fall, though the budget remains ahead of 2014 targets.

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Finance Minister Yair Lapid as the treasury presented its 2015 draft budget, September 28, 2014.
Finance Minister Yair Lapid as the treasury presented its 2015 draft budget, September 28, 2014.Credit: Emil Salman

On the eve of an election and a likely run-up in spending before the end of the year, the government’s strong fiscal performance for 2014 has been tarnished by a wider deficit and falling tax revenues for November.

The budget deficit widened last month to 1.3 billion shekels ($330 million), 300 million shekels more than the same time in 2013, the Finance Ministry said Tuesday. The 12-month trailing deficit rose to 2.6% of gross domestic product, up 0.1 percentage point from October although still well below the 2014 target of 3%.

November tax collections were down 1.2% on the year after inflation to 21.1 billion shekels, with direct taxes (income tax and property taxes) dropping 7.2% to 9.8 billion shekels. Indirect taxes, mainly the value-added tax and customs, rose 4% from a year ago to 10.8 billion shekels, the treasury said.

Government spending, not counting repayment of debt, came to 23.9 billion shekels. The figure represented an increase from a year ago mainly due to a 1.2-billion-shekel payment made to state-supported pension funds.

The November figures come after a year marked by deficits and spending both lower than targeted and revenues that have exceeded treasury expectations.

For the first 11 months of the year, the government collected 233.7 billion shekels in taxes, a 5.9% increase over the same time in 2013 after inflation. Government spending was up just 3.3% to 227.5 billion shekels, and civilian spending was ahead 3.5%, less than half the budgeted rise. Defense spending, which was budgeted to decline 7%, actually rose 2.8%.

The whole picture helped reduce the deficit to 14.3 billion shekels, down from 19.5 billion shekels in January-November 2013, far below the 31.1 billion shekels targeted by the treasury in the 2014 budget.

But the fiscal discipline is likely to unravel to one degree or another. Ministries tend to spend heavily in the final weeks of the year, a phenomenon that will almost certainly be exacerbated by the election campaigning now under way.

Two weeks ago the credit rating agency Fitch lowered Israel’s credit outlook to Stable from Positive, citing the costs of last summer’s fighting with Hamas and plans to raise the 2015 budget deficit. Since then, the 2015 budget has fallen victim to the election, which means the 2014 spending framework will remain in place until a new government is elected and can craft its own budget.

Tax collections provide a barometer for economic activity, but this year they have defied what economists say has been a marked slowdown. Direct and indirect taxes rose 5.7% after inflation in the first 11 months of the year. The state’s tax take was 2.7 billion shekels more than what the treasury had forecast, although 1.5 billion of that was due to one-time factors.

According to the treasury estimates, tax revenues climbed 4% in the 12 months through November. It said, however, that the pace slowed from the second quarter to 3-4% from 6-7% in the last two quarters of 2013.

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